The deal to avert the so-called fiscal cliff held most taxes steady for most taxpayers. This was, after all, the overlapping part of the political goals of Democrats and Republicans. Democrats wanted the Bush tax cuts extended for taxpayers making less than $250,000 per year, and Republicans wanted them extended for taxpayers at all income levels. The final deal keeps the tax cuts for more Americans than the Democrats wanted, and less than the Republicans wanted.
To put a more specific point on this issue, however, is that the IRS issued guidance to businesses on December 31st to begin withholding higher amounts from worker’s paychecks. Since no deal was reached by the end of the year, the IRS had to move forward with the current law. On January 3, 2013, the IRS issued revised guidance that kept the withholding for everyone making under $400,000 (filing single), or $450,000 (married filing jointly), the same.
Taxes Up for Everyone in 2013?
Depending upon how you choose to view things, the fiscal cliff deal meant no tax increases for most Americans. However, most taxpayers will actually see a smaller paycheck in 2013.
For part of President Obama’s stimulus plan, the amount employees pay into Social Security was cut by two percent to 4.2 percent. The amount employers pay was not changed. That was a temporary tax cut and was allowed to expire.
So, how come politicians are claiming there was no tax increase?
It all comes down to how you parse the language. There was no INCOME TAX increase for most non-high income taxpayers. The actual tax rates and the brackets stayed the same. Actually, the brackets increased slightly due to the adjustment for inflation. Furthermore, since the Social Security tax reduction was a temporary stimulus, and not an actual tax cut, per se, then one can claim there was no tax increase there either.
The real world impact is that the FICA taxes on your paycheck will be higher in 2013 than they were in 2012 and 2011, when the stimulus was in effect. In 2012, the Social Security part of FICA was 4.2 percent. In 2013, the Social Security part of FICA will be 6.2 percent. So, yes, your paycheck will be smaller, to the tune of approximately two percent.
Remember that the Social Security wage base limit is $113,700 for 2013. Income above this amount will continue to not incur social security taxes.
For the self-employed, the same tax increase will be reflected in a two percent higher self-employment tax.
For some state employees, specifically those where the state has opted out of the Social Security system in favor of a state run pension, such as Colorado and California, there will be no change in your paychecks, since the two percent SS tax cut never applied to your pay in the first place.
Higher Medicare Taxes for 2013
Another little quirk in the tax system means that some taxpayers will be paying more Medicare taxes in 2013. This tax increase, however, is not a result of the recent fiscal cliff deal. Rather, this is a part of Obamacare that pays, in part, for the expansion of the Medicare system to cover more people.
Employees will pay the normal Medicare tax rate of 1.45 percent on all wages up to $200,000. Above $200,000, an additional 0.9 percent “Additional Medicare Tax” is withheld, for a combined rate of 2.35 percent.
This one is a little confusing. Employees earning more than $200,000 do not pay the higher rate on all earnings, only on the amount over $200,000. This additional tax rate is not prorate or pre-calculated. Rather, when the employee’s wages go over $200,000 for the calendar year, THEN the higher rate kicks in.
For example, a man earn $240,000 per year paid twice per month would earn $10,000 per pay period. From January to October, the employee would pay the normal 1.45 percent Medicare tax. Beginning with the 21st pay period, the employee would pay the additional 0.9 percent rate, for November and December.
The 2013 tax tables, for filing taxes in 2014, will be updated as well. The 2012 tax tables for filing taxes in Spring 2013 are unchanged.